International evidence on the sustainability of budget deficits

Abstract

The sustainability of budget deficits of the G-7 countries is examined in this paper. Following the approach taken by Hakkio and Rush it is found that in the case of Germany it appears for each dollar increase in expenditures, revenues increase by an equal amount. For France, Japan, and Italy (real per GDP measure) the budget deficits of these countries may not be sustainable due to the lack of cointegration. In the cases of Canada, Italy (real levels and real per capita measures), United Kingdom, and the United States (real levels and real per capita) cointegration is present between revenues and expenditures. However, the estimated coefficients on expenditures for these countries are significantly less than one which suggests that government spending is growing faster than government revenue.